Tune in to the latest episode of Money, I’m Home as Lynne is joined by Consumers mortgage expert David Pendley to discuss the value and intricacies of home equity lines of credit (HELOCs).

 

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0:00:06.4 Lynne Jarman-Johnson (LJJ): Money, I’m home! Welcome in. I’m Lynne Jarman-Johnson with Consumers Credit Union. From finance to fitness, we have it all. And we also have today our very special guest, David Pendley. He is our vice president of mortgages. And I’ll tell you what, he knows the industry so well, and we have had such an up-and-down rocky time. Today I’m going to actually talk to you about something that when I hear the words, I think it’s automatically a mortgage product. And that is home equity line of credit. What’s a HELOC?

0:00:35.8 David Pendley (DP): Yeah, what’s a HELOC? It’s the equity in your home. We’re going to borrow against the equity in your home, a home equity line of credit. So, it’s like a big credit card, depending on the equity you have in your home.

0:00:47.5 LJJ: Now what is interesting is, growing up, I always thought once I had a mortgage that at HELOC has to be connected to the organization you got your mortgage from. Is that kind of an assumption?

0:01:00.2 DP: Yeah, that is an assumption. Like, you have to reach out to them. No, a second mortgage is just that it’s on top of your old mortgage and you can get it through whoever you’d like.

0:01:09.9 LJJ: And why is it that those are all of a sudden the buzzwords lately? Is it the whole industry going wacky?

0:01:18.1 DP: It is a very interesting time right now, I think we’re in the front end of maybe some economic trepidation. Like, there’s some concern. We saw this way back in ’07 and ’08, people started running out and opening up HELOCs as a safe gap measure in case they need cash in the future. Our savings are down. Why are savings down? Well, that’s obvious, inflation. People, credit card debt just topped $1 trillion. And so, a lot of people are using their home equity lines to pay off their credit card debt.

0:01:46.3 LJJ: And that’s thinking long-term for the future, right?

0:01:50.5 DP: That’s correct. That’s correct.

0:01:52.7 LJJ: So, David, it sounds like using a HELOC can be a very smart thing but sometimes can it be like, ooh maybe you shouldn’t use it for, I don’t know, buying 1,000 socks.

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0:02:04.7 DP: Yeah, I think 1,000 socks probably would qualify, but no probably not a car, things that depreciate because the equity in your home is precious, you’ve worked hard, you’ve achieved something, but sometimes you can use it as a tool maybe to consolidate some high-interest credit loans and then you can use it to maybe pay those off sooner.

0:02:25.4 LJJ: But I do like what you just said. Look at what it is that you’re going to use it for, because as you say, you drive a car off the lot and it’s already less.

0:02:35.0 DP: Yeah, exactly. We used to, way back years ago, we used to tell people, when you get your home equity line of credit checks, put them in a safe deposit box where you literally have to go drive somewhere to take one out and use it, because you can get very comfortable and all of a sudden you’re burning the equity in your home for groceries or a vacation.

0:02:53.0 LJJ: And you just go, “I can use it. Oh, I can use it.” And you’re not using it for what it was intended for.

0:02:58.7 DP: Exactly. And then it’s like stopped. You’re out of equity.

0:03:00.5 LJJ: Oops.

0:03:02.4 DP: Oops.

0:03:02.8 LJJ: So, when is it that someone should be looking at a home equity and how does that work? Do they just… They can obviously call c=Consumers.

0:03:11.9 DP: Yeah, it’s part of your overall financial comprehensive plan. So, I would seek advice on it, because sometimes we’ll see people come in into a HELOC for maybe a wedding and then they come back and say, “Okay, now I want to add my credit cards to it.” And, “Oh we bought this car,” and pretty soon all their equity in their house is gone. And maybe the market actually backs up and their house drops a little bit in value. We saw this in ’07, ’08, ’09, where house actually declined and lenders started cutting home equity lines, like cutting the available credit on it and put people upside down in their houses. So, you want to be really careful when you’re tapping the equity of your house.

0:03:46.4 LJJ: Well, and that’s why it’s so important to talk with somebody, right? To say, “Hey this is what I’d like to do with it.” We like to ask the questions of the story, right? And see if there’s a pattern that could get them into trouble. Not to say deny, but to really talk about what’s going on to make sure that long-term the vision is right.

0:04:05.7 DP: Yeah. As a mortgage loan officer or a mortgage planner, we look at it as we’re on the debt side of your overall comprehensive financial plan. So maybe you do take 40,000 out of your home equity line to pay off some credit cards or some high-interest debts with the goal or the objective of paying it off in 24 months. Having a real logical plan just so you don’t run into that pattern where it keeps going higher and higher and higher.

0:04:30.6 LJJ: And then all of a sudden you feel like you’re drowning, right?

0:04:33.7 DP: Yes, exactly. Exactly.

0:04:35.2 LJJ: Drowning in debt. Obviously.

0:04:36.1 DP: Right, right.

0:04:36.2 LJJ: So, with the industry, you had mentioned the economic trepidation that is… Everybody’s feeling it, there’s the pinch and yet entertainment, you go out to restaurants, they’re packed. So, their spending is still a little high, and yet now savings is lower, credit cards are higher.

0:04:56.4 DP: Yeah. Well, you can’t walk out of a grocery store. You take two bags of groceries and it’s $120. Like what happened? It’s just everything, our gas and every economic people. But you’re right, we’re Americans, we still want to live our lives and we’ve just come off of COVID, and you and I too, we’re outgoing people, we want to be out and about.

0:05:14.2 LJJ: Let’s go.

0:05:15.7 DP: So, until we can’t one thing that we are very bullish on is, for the most part we’re pretty bullish on our jobs right now in America. There’s an employment shortage of course. And so, it’s a really convergence of very interesting dynamics. But we want to make sure that we use that at HELOC which can be a valuable tool in a very disciplined way.

0:05:36.6 LJJ: So, when someone says to you, “Hey I’m looking at a HELOC or a home equity line of credit,” you just mentioned second mortgage really that’s what it is.

0:05:45.8 DP: It is a second mortgage. You could get a fixed-second mortgage where it’s just, you borrow 60,000 and you pay it for 15 years and it’s paid off. This is like your own little mini bank. You’re tapping into the equity of your house. It’s like a big credit card tied to the equity of your house. The advantages is the interest rate deductibility and also it’s generally a lower rate than a credit card.

0:06:10.3 LJJ: And that’s really important to look at, isn’t it? Because with interest rates especially if you’re variable, boy, if the interest rate keeps going so is your credit card interest rate?

0:06:19.5 DP: Yeah. Your credit card interest rate can go up and your HELOC can go up, too. So, you want to…

0:06:22.4 LJJ: So just know where it starts and how and what’s the balance of saving that money?

0:06:28.2 DP: Exactly. Whenever I do an adjustable-rate mortgage or a HELOC, I say let’s work a worst-case example. What if rates are at 13%? What if they’re at 14%? Oh no, I could live with that. I could absorb that. Or, Oh, no that’s too risky for me. Let’s look at another option.

0:06:43.5 LJJ: What a great conversation though to have.

0:06:44.7 DP: Yeah, yeah. You need to, because we don’t know what tomorrow’s going to bring. My hope it’s going to be blue skies and gorgeous outlook. But we don’t know. We’ve got a lot of interesting dynamics coming up in the near future.

0:07:00.8 LJJ: Well, let’s talk about the near future because right now it looks like the inventory is still low, but I think the houses are sitting a little bit longer. Is that true?

0:07:10.8 DP: They are. We’re not seeing the double, triple, quadruple offers on the homes. They are sitting a little while longer, which is great. In America right now, we have 1 million in inventory but we have about 2 to 3 million buyers.

0:07:25.5 LJJ: Wow.

0:07:26.0 DP: So, it’s still a shortage. What we really need is that first-time starter home to come in and not be at this inflated price. So, this is the little bit of a slowdown we’re feeling right now is really good. It’s necessary because it was getting euphoric and we didn’t know if the escalation in the prices of these houses was it real or not. Or was it just temporary, a function of the market?

0:07:47.6 LJJ: And so those first-time homebuyers what do you say David that can help them think about, “Hey maybe this is the time to try to get in the market.” I know there’s a lot of fear about, A, I’m going to spend way too much money than I even have for my budget, but yet I feel like eh I got to get it.

0:08:07.4 DP: Yeah. I think right now we’re just seeing the front end of being able to buy a house at a reasonable price without a bidding war type of environment, which is great. Now granted you’re going to pay an interest rate today roughly 7%-ish. That stinks. But remember that the rate is just temporary. We can always refinance that later as rates drop. One thing we kind of know in America for sure, is we are in a housing shortage market. This isn’t going away anytime soon. As you just look at the demographics, we are going to be in a housing shortage for years to come. If you can achieve home ownership right now, definitely do, work with your mortgage planner, work with your great realtor. I always say, build a team, maybe an attorney or financial planner, the whole package somebody’s gone before you, and kind of set a strategy and say, “Okay, I’m going to try to find that three-bedroom two bath home. I need it to be under 330,000. I’m going to do it. I’m may have to expand my area but I’m going to keep looking until I achieve this.”

0:09:10.1 LJJ: And know your parameters.

0:09:11.0 DP: Know your parameters. Exactly.

0:09:13.3 LJJ: In advance. Yeah. One of the things that that you have always stated which I think is optimistic always is that, even if it’s a tight market doesn’t mean that you’re definitely out. And that one of the most important things you can do is get that pre-approval ready.

0:09:29.3 DP: Yeah. Yeah. Have that pre-approval ready and sales we call it your value proposition. Why are you in sales? It’s the same thing with selling yourself to buy that house. Have the strong down payment, make sure your credit has been achieved to the maximum credit score you can. And try to present the seller with the most palatable, exciting, interesting offer. Sometimes a buyer doesn’t really know what the seller wants, they think it’s just price. Sometimes there’s other things, tricks like, “Hey, you can stay in the house two months after closing,” or other types of things that the seller truly may want.

0:10:03.9 LJJ: And so, make sure you ask those questions.

0:10:04.7 DP: Yeah. What does the seller really want?

0:10:07.4 LJJ: Well, thank you again. And really we… If anybody is interested in any type of a mortgage, whether it’s a home equity, you can contact obviously Consumers Credit Union. We sure do love to serve you. Thanks again, David.

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0:10:20.4 DP: Thanks, Lynne. It’s good to be here.

0:10:22.9 LJJ: Hey, thank you for listening, and thank you Jake Esselink for your production skills. I’m Lynne Jarman-Johnson with Consumers Credit Union. We’ll see you next week.

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